Elsworth Ethanol Company Ltd & Anor v Hartley & Ors [2014] EWHC 99 (IPEC)

[2014] EWHC 99 (IPEC)Case No CC 12 P 01450
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
INTELLECTUAL PROPERTY ENTERPRISE COURT
Venue Royal Courts of Justice, Rolls Building, Fetter Lane, London, EC4A 1NLDate 03/02/2014
Before
HIS HONOUR JUDGE HACON
Between
(1) ELSWORTH ETHANOL COMPANY LIMITEDClaimants(2) NEIL BOOKLESSClaimant(1) BRIAN SELBY HARTLEYDefendants(2) NAMDAR BAGHAEI-YAZDIDefendant(3) MUHAMMAD JAVEDDefendant(4) BIOCONVERSION TECHNOLOGIES LIMITEDDefendant(5) ENSUS LIMITEDDefendant
Mr Amardeep Dhillon (instructed by Innovate Legal) for ClaimantsMr Michael Hicks (instructed by Redd Solicitors LLP) for Fifth DefendantHearing Hearing dates: 18 th and 19 th December 2013
JudgmentHis Honour Judge Hacon :Introduction
[1]This action concerns the ownership of a family of patents and patent applications. They are all derived from an application made to the UK Intellectual Property Office on 24th March 2006, number GB 0605890.3 (“GB 890”).[2]In contrast with many disputes concerning patent ownership, the identity of the inventors of the invention claimed in GB 890 is common ground: the second and third defendants, whom I shall refer to as Dr Yazdi and Dr Javed respectively.[3]GB 890 was applied for in the name of the fourth defendant (“BCTL”). Subsequently a PCT application was made using GB 890 as the priority document, namely PCT/GB2007/0010160 (“the PCT Application”). To date one patent has been granted deriving priority from GB 890, European Patent No. 2007897 (“the European Patent”).[4]On 14September 2012 BCTL went into administration. By a written agreement dated 17 December 2012 the fifth defendant (“Ensus”) acquired various patents and applications from the administrator, including the European Patent, the PCT Application and all applications derived from it. These are presently still held by Ensus.[5]The claimants’ case is that GB 890 should have been applied for in the name of the first claimant, not BCTL. For reasons that will become apparent I will refer to the first claimant (company no. 04600903, incorporated on 26 November 2002) as “the 2002 Company”. The claimants seek the transfer of ownership of the European Patent, the PCT Application and all applications and patents which may be derived from it (collectively “the GB 890 Rights”) to the 2002 Company. In the alternative, the re-amended Particulars of Claim seeks joint ownership of the GB 890 Rights by the 2002 Company along with either BCTL or Ensus.[6]This claim to transfer of title to the 2002 Company, or alternatively joint title, is put two ways. The claimants’ primary case is that between 5 April 2005 and 31 May 2006, thus including the date on which GB 890 was filed (24 March 2006) the first defendant (“Professor Hartley”) and Drs. Yazdi and Javed were de facto directors of the 2002 Company. As such they each owed a fiduciary duty to the 2002 Company which was breached by, in the case of Professor Hartley, instructing a patent agent to apply for GB 890 in the name of BCTL, rather than the 2002 Company, and in the case of Drs Yazdi and Javed by allowing the application to remain in BCTL’s name during the remaining period of their role as de facto directors of the 2002 Company. The claimants say that in consequence it would be inequitable for Ensus, as successor to BCTL, to retain ownership of those rights.[7]The claimants’ secondary case is that the 2002 Company or alternatively the second claimant (“Mr Bookless”), director and shareholder of the 2002 Company, agreed with Professor Hartley and Drs Yazdi and Javed that the 2002 Company would provide funding for research which led to the invention claimed in GB 890, through loans from Mr Bookless. In return the 2002 Company would be named as proprietor of any patent applications flowing from that research. In breach of one or other of those agreements GB 890 was applied for in the name of BCTL.[8]The claimants’ case against Professor Hartley and Drs Yazdi and Javed was settled by a consent order dated 29 August 2013. The claim against BCTL is stayed as BCTL is in administration. Ensus was joined as a defendant at the CMC, by an order dated 19 February 2013, and at trial was the only defendant.[9]At the start of the trial it was agreed between and submitted by the parties that argument as to the appropriate remedy to which the 2002 Company is entitled, if it succeeds in relation to either cause of action, should be heard at a later date.[10]There is a counterclaim. It arises only if the claimants succeed in their claim. Ensus argues that when it acquired the GB 890 rights from BCTL it also acquired any rights of action BCTL would have had in the event that BCTL had been required to transfer those rights to another party. Ensus seeks an order that as a condition for transfer of ownership of patents or applications to the 2002 Company, the 2002 Company must reimburse Ensus with the fees and expenses incurred by BCTL in prosecuting and maintaining the relevant patents and applications. Again, the parties agreed and submitted that argument on the counterclaim would be heard at a later date if it arose.[11]Generally in this court, leaving some of the issues to be heard at a later date is not likely to be sanctioned. However, exceptions are possible and in the present case by the time the trial came before me there was a serious risk that it would overrun if all issues, including the contingent ones, were heard then and there. I therefore approved the approach agreed by the parties.

The background facts

[12]Mr Bookless is a former airline pilot and was employed in that capacity from 1996 to 2001. In or about 2002 he developed an idea relating to the recycling of waste material to produce energy. Mr Bookless had the concept of what he called an integrated recycling centre (“IRC”) for that purpose. In late 2002 he incorporated a company to take the idea forward: the 2002 Company, then called EECO Limited, trading as Environmental Energy Company Limited.[13]At about the same time Mr Bookless became aware of Agrol Limited (“Agrol”) which was in the business of converting wood waste material into ethanol using biological technology. In July 2003 Mr Bookless attempted to contact Agrol in order to discuss the possibility of collaboration, or of licensing their technology. On about 17 July 2003 he spoke on the phone to a representative of Agrol. This was Dr Yazdi. Dr Yazdi explained that Agrol had ceased trading due to lack of funds and its majority shareholder, Carlton Poon, was seeking further finance. Mr Bookless suggested a meeting.[14]Mr Bookless and Dr Yazdi met on 28 July 2003. Mr Bookless told Dr Yazdi of his IRC project and the two discussed the prospect of Dr Yazdi and his colleagues working on that as well as taking forward the technology that Agrol had been developing. Dr Yazdi referred to a company of which he was a director, namely BCTL.[15]Things moved forward. On 15 September 2003 Dr Yazdi told Mr Bookless that a subsidiary of Agrol, Elsworth Biotechnology Limited (“EBT”) had patents which might lapse if Mr Poon was not successful in re-financing Agrol. The patents concerned the genetic modification of thermophilic microorganisms which were capable of producing ethanol from wood products for use as vehicle fuel. One microbe at the centre of the invention claimed in EBT’s patents was called ‘TNT9’. Dr Yazdi also identified two colleagues working at Agrol, namely Professor Hartley and Dr Javed.[16]By March 2004 Mr Bookless, Professor Hartley and Drs Yazdi and Javed had agreed to cooperate in an application to the Department for Agriculture, Farming and Rural Affairs (“DEFRA”) for funding to support the development of a fermentation process using TNT9 and, as at least Mr Bookless saw it, to form the basis of a larger system, namely his IRC project. An application was made to DEFRA on 13 April 2004.[17]Mr Bookless met Professor Hartley and Dr Javed for the first time, along with Dr Yazdi, on 15 May 2004 at Professor Hartley’s home in Elsworth, a village in Cambridgeshire. A joint submission was made to DEFRA on 10 June 2004.[18]On 26 August 2004 DEFRA notified Mr Bookless that no funding would be forthcoming. DEFRA was nonetheless open to a second round of applications and a revised application was delivered to DEFRA by Mr Bookless on 29 September 2004. This too was subsequently rejected, on 20 February 2006.[19]In the interim, from about December 2004 Mr Bookless entered into negotiations with Mr Poon for the purchase of EBT’s patents. In May 2005 Mr Poon offered to sell the patents for £200,000. During much of the remainder of 2005 Mr Bookless made efforts to raise funds from his personal and professional contacts.[20]In December 2005 Drs Yazdi and Javed met Mr Bookless at his home and disclosed an idea Dr Javed had conceived to improve the productivity of the TNT9 microbe for ethanol production.[21]On 5 February 2006 the three met again, this time with Professor Hartley, at Professor Hartley’s home in Elsworth. Three new ideas were discussed. The first was Dr Javed’s idea for enhanced bio-ethanol production. The second was a project that Professor Hartley had devised some time earlier which he called the ‘redox death’ idea. The third came from Mr Bookless which concerned the design of a reactor pipe vessel. They decided to continue with all three ideas and also to persist in the attempt to buy EBT’s patents from Mr Poon, though the latter was looking less likely to happen.[22]By late February 2006 drafts of two patent applications were circulated, one relating to Dr Javed’s enhanced microbial product of ethanol and the other to Professor Hartley’s redox death idea.

Meeting of 5 March 2006

[23]On 5 March 2006 there was a significant meeting of the four individuals at Professor Hartley’s house. Written minutes of the meeting were drafted by Mr Bookless on 12 March 2006 and later signed by him and Dr Yazdi.[24]At that meeting it was decided that the attempt to buy EBT’s patents from Mr Poon should be abandoned. Instead the three ideas of Dr Javed, Professor Hartley and Mr Bookless were to be developed. Withers and Rogers, a firm of patent agents, would be instructed to draft three patent applications.[25]Under the first items discussed, headed ‘IP’, the minutes record that three patent applications to be prepared by Withers and Rogers were to be assigned to ‘EECO’. I will return below to what ‘EECO’ was intended to mean. In any event the discussion moved on.[26]The future business relationship between the individuals was discussed. Mr Bookless proposed equal shares in BCTL with “Elsworth Ethanol given sole rights to the Ethanol technology exploitation. Shares could be allocated in Elsworth on the basis of investment funds or for work undertaken.” I will return to what was meant by ‘Elsworth Ethanol’. According to Mr Bookless both Dr Yazdi and Dr Javed, the two directors of BCTL, were unhappy with this idea because they viewed BCTL as a vehicle for their own research.[27]Under ‘Any other business’ Professor Hartley made an alternative proposal. It was that a new company be formed to develop the proposed projects. Mr Bookless said that he had already formed a company (company no. 5579821) which was currently dormant, called Environmental Ethanol Company Limited. He had done this on 30 September 2005. The minutes suggest that all agreed that this could be a suitable corporate vehicle for the new projects. I will refer to this as ‘the 2005 Company’.[28]The minutes also show that Professor Hartley asked that the 2005 Company be renamed ‘Elsworth Ethanol Company’ after the village in which he lived and it is common ground that the other three agreed to this. (This did not subsequently happen, as will be explained below.)[29]These minutes, as drafted on 12 March 2006, are headed ‘Elsworth Ethanol Company’, which on its face is odd; when the four individuals assembled for the meeting they were not aware of the proposed name Elsworth Ethanol Company, whether for the 2005 Company or otherwise. Equally, the reference in the minutes to ‘Elsworth Ethanol’ in the context of dividing up the ownership of BCTL seems anomalous. This part of the discussion seems to have come before Mr Bookless revealed the existence of the 2005 Company and thus before Professor Hartley asked that it be renamed ‘Elsworth Ethanol Company’. The explanation may lie in the fact that the minutes were drafted by Mr Bookless a while after the meeting on 12 March 2006.[30]It is clear anyway that no decision was taken as to what the precise role of the 2005 Company was to be, or as to its ownership or directors. Nor was there any final decision at that meeting as to the corporate vehicle to be used for the proposed projects, or as to the ownership of that vehicle.

Continued work on the projects

[31]Work continued on the projects based on the ideas of Dr Javed and Professor Hartley. Some of this was done at Imperial College London and the University of Surrey by Mr Khalaf, a PhD student supervised by Professor Sharif, a colleague of Drs Yazdi and Javed. It is common ground that lab equipment for this work was paid for by the 2002 Company. However, at least initially, Professor Sharif and Mr Khalaf were paid by Professor Hartley.

Draft patent applications

[32]On 11 March 2006 Dr Javed circulated a new draft of the patent application for his enhancement of microbial ethanol production invention, naming himself and Dr Yazdi as inventors. The proposed applicant was stated to be ‘Elsworth Ethanol Company Limited’, at that time the proposed name for the 2005 Company.[33]At some point the idea for a patent application relating to Mr Bookless’s design for a reactor pipe appears to have fallen by the wayside. Patent applications for the two other ideas were pursued. Amended drafts were circulated from time to time, all of which (or at least all of those in the trial bundles) show ‘Elsworth Ethanol Company Limited’ as the proposed applicant.[34]Withers and Rogers informed Mr Bookless that they could not handle these applications because they continued to act for Agrol and consequently there was a conflict of interest. They referred Mr Bookless to Dr Neil Thornton of another firm of patent attorneys, Reddie & Grose.

Meeting of 24 March 2006 at Reddie & Grose

[35]On 24 March 2006 Mr Bookless and Professor Hartley attended the offices of Reddie & Gross in Cambridge. Drafts of the two patent applications were provided to Dr Thornton. It is the claimants’ case that when Dr Thornton asked for the name of the party in whose name they were to be filed, Professor Hartley said that it should be BCTL and, taken by surprise, Mr Bookless did not demur. In fact he raised no objection for many months. On Dr Thornton’s account it was Mr Bookless who instructed him to file in BCTL’s name.[36]The applications were filed on that day, 24 March 2006, with BCTL named as applicant.[37]The patent application in relation to enhanced microbial ethanol production was GB 890. The other application was subsequently abandoned and plays no part in this action.[38]The invoices presented by Reddie & Gross for filing the two applications were paid by the 2002 Company.

Negotiations with Low Carbon Initiative

[39]In late March 2006 Mr Bookless, Professor Hartley and Drs Yazdi and Javed became aware of the possibility that an organisation called Low Carbon Initiative (“LCI”) might be a source of investment in the bio-ethanol project. Negotiations took place in April and by the end of that month it appeared that LCI might be willing to offer £2.5 million to fund the project. The investment vehicle was to be a fund called “the Low Carbon Accelerator Fund” (“LCA”).[40]All four met officers of LCI in the afternoon of 3 May 2006. All four presented business cards bearing the names ‘EECO Ltd’ and ‘Elsworth Ethanol Company’. Significance was attached by the claimants to these cards and I return to that below.[41]A condition of LCI’s investment was that it would be in the company that owned the patent rights in the bio-ethanol invention. At a meeting on 11 May 2006 Mr Bookless suggested that the solution was to have BCTL, the company owned by Drs Yazdi and Javed and which was registered as proprietor of the patent applications (including GB 890), brought into the ownership of the company identified as ‘Elsworth’ in the minutes of that meeting. This was firmly rejected by Professor Hartley and Drs Yazdi and Javed. No solution was agreed.

Investment in the 2002 Company by Professor Hartley

[42]In an email dated 24 April 2006 to Mr Bookless, Professor Hartley indicated his intention to invest £80,000 in the 2002 Company, £20,000 on behalf of each of his four children.[43]In the end the 2002 Company only received £20,000, from Professor Hartley’s son Christopher, as provided to him by Professor Hartley.

Change of company names

[44]As noted above, the parties had agreed on 5 March 2006 that the name of the 2005 Company should be changed from Environmental Ethanol Company Limited to Elsworth Ethanol Company Limited.[45]In fact, on 17 May 2006 at Mr Bookless’s instigation the 2005 Company instead changed its name to EECO Limited. At the same time the 2002 Company changed its name from EECO Limited to Elsworth Ethanol Company Limited.[46]Mr Bookless’s evidence was that he was advised that as the 2002 Company had applied for Enterprise Investment Scheme status, it would have to be this company that would be the entity which would exploit the bio-ethanol scheme. In his witness statement (para 192) he said that this was “within the spirit and letter of what had previously been agreed” with the other three individuals. Since Professor Hartley had requested that the bio-ethanol enterprise should be held by a company using the ‘Elsworth’ name, it was the 2002 Company which acquired that name. The 2005 Company took the EECO name because, according to Mr Bookless, EECO was his brand (para 108).[47]There was in the evidence a copy of a special resolution of the 2002 Company dated 11 May 2006 recording a general meeting of that company held on 11 May 2006 at which there was a special resolution to change the name of the 2002 Company to Elsworth Ethanol Company Limited. It is signed by Mr Bookless. There was no evidence that Professor Hartley or Drs Yazdi or Javed knew about this on 11 May 2006.

Letters of 1 June 2006

[48]On 1 June 2006 Mr Bookless wrote separately to Professor Hartley, Dr Yazdi and Dr Javed stating, among other things, that 31 May 2006 was the date of termination of their posts as Elsworth Ethanol Company’s (in this context the 2002 Company’s) Senior Scientific Advisor and Director of Science and Director of Research and Development respectively.

Challenge to ownership

[49]By a letter dated 22 May 2007 to Dr Yazdi, Mr Bookless, writing as managing director of the 2002 Company (on notepaper headed ‘Environmental Ethanol Company’ and ‘EECO’) for the first time expressly challenged BCTL’s ownership of the two patent applications filed in BCTL’s name on 24 March 2006, i.e. including GB 890. This litigation followed.

The change of company names

[50]The change of name by the 2002 Company from EECO Limited to the 2005 Company’s proposed name (Elsworth Ethanol Company Limited) and the simultaneous renaming of the 2005 Company to EECO Limited, on 17 May 2006, have bedevilled this case. It is frequently difficult to be certain which company is being referred to when the names ‘EECO’, ‘Elsworth’, or ‘Elsworth Ethanol Company’ are used in the documents. The problem is exacerbated by the fact that EECO is not merely a company name that was swapped, it is also a convenient shorthand for both Elsworth Ethanol Company and Environmental Ethanol Company (the 2005 Company’s original name). At one point I thought that at least the latter difficulty might be resolved in part by what seemed to be a distinction in the documents between ‘EECO’ and ‘EECo’. Sadly not. Neither counsel greeted with any enthusiasm my suggestion that this could have been an intended distinction.

The Law

[51]Mr Dhillon relied largely on Holland v Commissioners for HMRC [2010] UKSC 51; [2010] 1 WLR 2793 as setting out the law on de facto directors. Mr Hicks referred instead on the discussion by Lewison J in Ultraframe (UK) Ltd v Fielding [2005] EWHC 1638 (Ch); [2006] FSR 17. However Ultraframe came before Holland and was expressly taken into account by the Supreme Court in the latter case.[52]The most relevant passages in Holland for this case come from the speeches of Lord Hope and Lord Collins, both of whom were in the majority in dismissing the appeal. Lord Hope said:
“30. In In re Richborough Furniture Ltd [1996] 1 BCLC 507 the question was raised whether one of the three respondents, who was not a director of the company de jure, was nevertheless a director of the company de facto and as such liable under section 6 of the Company Directors Disqualification Act 1986 to be disqualified. Asking himself what is a de facto director, Timothy Lloyd QC (sitting as a deputy High Court judge) said, at p 524: “It seems to me that for someone to be made liable to disqualification under section 6 as a de facto director, the court would have to have clear evidence that he had been either the sole person directing the affairs of the company (or acting with others all equally lacking in a valid appointment, as in Morris v Kanssen [1946] AC 459) or, if there were others who were true directors, that he was acting on an equal footing with the others in directing the affairs of the company. It also seems to me that, if it is unclear whether the acts of the person in question are referable to an assumed directorship, or to some other capacity such as shareholder or, as here, consultant, the person in question must be entitled to the benefit of the doubt.”
He held that the individual in question, who was a business consultant providing computer and other management services to the company, was not a de facto director despite having undertaken negotiations with creditors and performed some of the functions of a finance director. 31. In Secretary of State for Trade and Industry v Tjolle [1998] 1 BCLC 333 Jacob J was referred to what was said in In re Hydrodam (Corby) Ltd [1994] 2 BCLC 180, including a passage at p 182 where Millett J pointed to the purpose of any test as being to impose liability for wrongful trading on those persons who were in a position to prevent damage to creditors by taking steps to protect their interests, and to In re Richborough Furniture Ltd [1996] 1 BCLC 507. He said [1998] 1 BCLC 333, 343–344:
“For myself I think it may be difficult to postulate any one decisive test. I think what is involved is very much a question of degree. The court takes into account all the relevant factors. Those factors include at least whether or not there was a holding out by the company of the individual as a director, whether the individual used the title, whether the individual had proper information (eg management accounts) on which to base decisions, and whether the individual had to make major decisions and so on. Taking all these factors into account, one asks ‘was this individual part of the corporate governing structure’, answering it as a kind of jury question. In deciding this, one bears very much in mind why one is asking the question. That is why I think the passage I quoted from Millett J is important. There would be no justification for the law making a person liable to misfeasance or disqualification proceedings unless they were truly in a position to exercise the powers and discharge the functions of a director. Otherwise they would be made liable for events over which they had no real control, either in fact or law.”
In that case the individual in question was given the courtesy title of deputy managing director but did not form part of the real corporate governance of the company. There was no function that she performed that could only be properly discharged by a director. 32. In In re Kaytech International plc [1999] 2 BCLC 351, 423–424 Robert Walker LJ said that he saw much force in what Jacob J said in the Tjolle case when he declined to formulate a single test. Referring to the passage which I have just quoted, he added this observation:
“I do not understand Jacob J, in the first part of that passage, to be enumerating tests which must all be satisfied if de facto directorship is to be established. He is simply drawing attention to some (but not all) of the relevant factors, recognising that the crucial issue is whether the individual in question has assumed the status and functions of a company director so as to make himself responsible under the 1986 Act as if he were a de jure director.”
Here again the word “assumed” is used. But, as Lewison J said in In re Mea Corpn Ltd [2007] 1 BCLC 618, para 83, in considering whether a person “assumes to act as a director” what is important is not what he calls himself but what he did: see also Secretary of State for Trade and Industry v Hollier [2007] Bus LR 352, para 66.” “It seems to me that for someone to be made liable to disqualification under section 6 as a de facto director, the court would have to have clear evidence that he had been either the sole person directing the affairs of the company (or acting with others all equally lacking in a valid appointment, as in Morris v Kanssen [1946] AC 459) or, if there were others who were true directors, that he was acting on an equal footing with the others in directing the affairs of the company. It also seems to me that, if it is unclear whether the acts of the person in question are referable to an assumed directorship, or to some other capacity such as shareholder or, as here, consultant, the person in question must be entitled to the benefit of the doubt.” “For myself I think it may be difficult to postulate any one decisive test. I think what is involved is very much a question of degree. The court takes into account all the relevant factors. Those factors include at least whether or not there was a holding out by the company of the individual as a director, whether the individual used the title, whether the individual had proper information (eg management accounts) on which to base decisions, and whether the individual had to make major decisions and so on. Taking all these factors into account, one asks ‘was this individual part of the corporate governing structure’, answering it as a kind of jury question. In deciding this, one bears very much in mind why one is asking the question. That is why I think the passage I quoted from Millett J is important. There would be no justification for the law making a person liable to misfeasance or disqualification proceedings unless they were truly in a position to exercise the powers and discharge the functions of a director. Otherwise they would be made liable for events over which they had no real control, either in fact or law.” “I do not understand Jacob J, in the first part of that passage, to be enumerating tests which must all be satisfied if de facto directorship is to be established. He is simply drawing attention to some (but not all) of the relevant factors, recognising that the crucial issue is whether the individual in question has assumed the status and functions of a company director so as to make himself responsible under the 1986 Act as if he were a de jure director.”[53]Lord Collins’ view of the law was similar. Having reviewed the history of the idea of a de factor director in English law he said:
“91. Once the concept of de facto director was divorced from the unlawful holding of office, there were two consequences. The first consequence was that the distinction between de facto directors and shadow directors was eroded. … The second consequence is that the courts were confronted with the very difficult problem of identifying what functions were in essence the sole responsibility of a director or board of directors. A number of tests have been suggested of which the following are the most relevant. First, whether the person was the sole person directing the affairs of the company (or acting with others equally lacking in a valid appointment), or if there were others who were true directors, whether he was acting on an equal footing with the others in directing its affairs: In re Richborough Furniture Ltd [1996] 1 BCLC 507. Second, whether there was a holding out by the company of the individual as a director, and whether the individual used the title: Secretary of State for Trade and Industry v Tjolle [1998] 1 BCLC 333. Third, taking all the circumstances into account, whether the individual was part of “the corporate governing structure”: see Secretary of State for Trade and Industry v Tjolle , at pp 343–344, approved in In re Kaytech International plc [1999] 2 BCLC 351, 423, where Robert Walker LJ also approved the way in which Jacob J in the Tjolle case had declined to formulate a single test. He also said, at p 424 that the concepts of shadow director and de facto director had in common “that an individual who was not a de jure director is alleged to have exercised real influence (otherwise than as a professional adviser) in the corporate governance of a company”
. See also especially In re Mea Corpn Ltd [2007] 1 BCLC 618 (Lewison J); Ultraframe (UK) Ltd v Fielding (No 2) [2006] FSR 293 (Lewison J); Secretary of State for Trade and Industry v Hollier [2007] Bus LR 352 (Etherton J). In fact it is just as difficult to define “corporate governance” as it is to identify those activities which are essentially the sole responsibility of a director or board of directors, although perhaps the most quoted definition is that of the Cadbury Report:
“Corporate governance is the system by which companies are directed and controlled” (Report of the Committee on the Financial Aspects of Corporate Governance, 1992, para 2.5).”
[54]I take these principles, adapted to the facts of this case, to be relevant:(1) There is no single test by which a de facto director may be defined. The court must take into account all relevant factors.(2) The following, although not constituting an exhaustive list, are of particular significance: (i) Where the individual (the putative de facto director) was acting with one or more others who were true directors, whether he was acting on an equal footing with those others in directing its affairs. (ii) Whether there was a holding out by the company of the individual as a director and whether he used the title. (iii) Taking all the circumstances into account whether the individual was part of the corporate governing structure, that is to say the system by which the company is directed and controlled.(3) Factor (i) is especially important. For someone to be held to be a de facto director alongside one or more de jure directors there must be clear evidence that he was acting on an equal footing with the other(s) in directing the affairs of the company.(4) If it is unclear whether the acts of a person are referable to an assumed directorship, or to some other capacity such as a consultant, that person must be entitled to the benefit of the doubt, i.e. there will be no inference of a de facto directorship.

Mr Bookless

[55]Mr Bookless was the only witness. I think he did his best to give an honest account of the evidence as he recalled it. But he retained a genuine sense of grievance that, as he saw it, he had been outmanoeuvred by Professor Hartley in particular and thus deprived of his entitlement to the GB 890 Rights. My impression was that this sense of grievance has led him to a firm belief that there was a clear understanding, indeed a binding agreement, that the 2002 Company was to be the vehicle for the bio-ethanol project and that references to the company names ‘EECO’, ‘Elsworth’ and so on in the documents should be interpreted accordingly.[56]I have therefore not greatly relied on Mr Bookless’s opinion as to which company is being referred to in any particular context, relying instead on the documents themselves where possible. I give an example. Mr Bookless on 2May 2006 annotated a draft term sheet of Elsworth Ethanol Company Ltd which was to be presented to LCI the next day. His annotations include this:
“I have already formed ‘EECO Ltd’ and ‘Environmental Ethanol Company Ltd.’ EECO has gained EIS status, and for simplicity I have been using this name to promote the business – as unsure how it would develop. I wish to keep EECO Ltd, and the logo, as my own separate Co. I have agreed that the company LCI and Family and friends will invest in is Environmental Ethanol Co. My Accountant has suggested simplest way forward is to ‘swap’ company names, due EIS clearance. Can this be achieved with name change to Elsworth from ‘Environmental Ethanol?”
[57]In cross-examination Mr Bookless accepted that ‘EECO Ltd’ and ‘Environmental Ethanol Company Ltd’ in the first sentence meant the 2002 Company and the 2005 Company respectively. However, he said that by “I wish to keep EECO Ltd, and the logo, as my own separate Co.” he meant only that he wished to keep the name and logo, not keep the 2002 Company for himself (Day 1, p.129, line 3 to p.131, line 11). That may be credible reading only the first three sentences quoted above. But I find it hard to reconcile his statement “I have agreed that the company LCI and Family and friends will invest in is Environmental Ethanol Co.” with any meaning other than that Mr Bookless had agreed that the projects were to be developed by the 2005 Company and that accordingly LCI and his family and friend investors would put money into the 2005 Company.

Evidence relied on by the claimants to infer de facto directorships of the 2002 Company

[58]The claimants rely on several heads of evidence which they say support the argument that Professor Hartley and Drs Yazdi and Javed were de facto directors. ‘Board meetings’[59]Professors Hartley and Drs Yazdi and Javed attended 8 meetings between 5th March and 28th May 2006 which the claimants refer to as ‘board meetings’ and which the claimants take to be board meetings of the 2002 Company.[60]In my view the minutes of those meetings, drafted by Mr Bookless, do not support any inference of de facto directorships. First, although these meetings are sometimes referred to as ‘board meetings’ in the minutes and those minutes are signed for the most part by Dr Yazdi as ‘Chairman of the Board’, I do not believe that they were truly board meetings of a company.[61]For that to be the case it would be necessary to identify the company concerned. Moreover, if there was a particular company under the aegis of which they were meeting, the most likely candidate is the 2005 Company. The minutes for the meetings up to 11 May 2006 are with one exception (24 April 2006) headed ‘Elsworth Ethanol Company’. In all of that period the understanding of Professor Hartley and Drs Yazdi and Javed is likely to have been that ‘Elsworth Ethanol Company’ was going to be the name of the 2005 Company, as agreed on 5 March 2006. It is not clear when Mr Bookless decided to give that name to the 2002 Company instead, but at least up to 11 May 2006 it is likely that he also associated ‘Elsworth’ and ‘Elsworth Ethanol Company’ with the 2005 Company.[62]Mr Bookless’s evidence was that ‘Elsworth’ in the minutes of the meeting of 11 May 2006 meant the 2002 Company. I do not accept that. I see no reason why Professor Hartley and Drs Yazdi and Javed should have at that stage attached the name ‘Elsworth’ to the 2002 Company. As I have noted, there is no evidence that they knew about the special resolution of the 2002 Company dated 11 May 2006 changing the name of the 2002 Company to Elsworth Ethanol Company Limited on the date that resolution was made. It was signed by Mr Bookless who had no need to refer the decision to change company name to anyone else. Moreover, paragraph 2.3 of the minutes of the meeting of 11 May 2006, which all four individuals undoubtedly attended, notes “It was previously agreed that all should consider Elsworth to have been formed 12 months ago, all agreed to 5th April 2005, for tax purposes”. This is consistent with ‘Elsworth’ being the 2005 Company.[63]Secondly, the key issue in all of these meetings was how to take forward the bio-ethanol and other projects. There was sometimes heated debate as to which company should be used as a vehicle for the projects. That debate was never resolved. In my view these were meetings about the projects. Had it been clear at the start and throughout that a particular company was to be used to carry the projects forward – projects in which all four individuals had an interest – it may have been possible to say that the decisions taken were not just about the projects but also about the conduct of that company. This never happened.

Dr Yazdi signed the minutes as ‘Chairman of the Board’

[64]Dr Yazdi signed 6 out of the 8 minutes as ‘Chairman’ only on 28 May 2006 at the invitation of Mr Bookless (as appears from the minutes of the meeting of that date). Dr Yazdi had no knowledge of company law and I have no reason to think that he attached any significance to this title. Moreover these were not documents presented to others and so he was not publicly holding himself out to be Chairman of anything.

Discussing the patent applications and IP strategy

[65]It is clear that both Dr Yazdi and Dr Javed discussed the bio-ethanol project with Professor Hartley and Mr Bookless and later with others such as Dr Thornton. This was not a discussion of any particular company’s strategy, save possibly that of BCTL after the patent applications were filed in that company’s name.

Assisting in proposed dealings with other parties to exploit the bio-ethanol project

[66]The claimants rely on the fact that Professor Hartley and Drs Yazdi and Javed both made suggestions about dealings with bodies such as the Home Grown Cereals Authorities and British Sugar which may have led to a way of exploiting the bio-ethanol idea and assisted in communications with such bodies. In addition they took time to assist in developing business plans for that idea, communicating with potential sources of funding such as LCI and the Carbon Trust, and noting potential competitors.[67]All this shows is that the three were active in contributing to the bio-ethanol project.

Represented to the public as directors

[68]The claimants suggest that Drs Yazdi and Javed represented themselves to be directors of the 2002 Company. They rely on business cards used. The cards bear both the name ‘EECO Ltd’ and ‘Elsworth Ethanol Company’. There was no ‘Elsworth Ethanol Company’ until after 17 May 2006 when the 2002 Company took that name. On 3 May 2006 when the cards were presented to LCA, it is likely that ‘EECO Ltd’ was intended to mean the 2002 Company and ‘Elsworth Ethanol Company’ was intended to refer to the 2005 Company. There was no evidence the LCA paid any attention to the cards or the identity of what appear to be two distinct companies referred to on them.[69]Assuming the cards were used in the period 17 to 31 May 2006, on their face they still suggest that Drs Yazdi and Javed worked for both the 2002 Company and the 2005 Company, following the renaming of both on 17 May.[70]Whatever others may have made of ‘EECO’ and ‘Elsworth Ethanol Company’, there was no evidence that the respective titles given to Dr Yazdi and Dr Javed on their cards, namely ‘Director of Science’ and ‘Director Research & Development’, were taken as representations that Drs Yazdi and Javed were company directors of either the 2002 or the 2005 Company. I think it is more likely that these were intended to, and were taken to be, job titles and nothing more.[71]The claimants also relied on a letter dated 14 May 2006 from Dr Javed to Professor Humber of the University of East London. Dr Javed stated “Both Dr. Yazdi and I are Directors of Elsworth Ethanol Company Ltd., joining Prof. Brian S. Hartley FRS, and Neil Bookless, the Managing Director.” Even assuming that Professor Humber took this to mean that Drs Yazdi and Javed, and Professor Hartley, were directors of the company, Dr Javed went on to say more in the letter about the company he was talking about:
“Elsworth was formed just over one year ago, to commercialise Prof. Hartley’s novel idea…for the bioconversion of sugars…into Bio-ethanol, for use as a bio-fuel.”
[72]The company formed a year or so earlier was the 2005 Company. This makes sense as at that time there was still afloat the idea that the 2005 Company would come to be the jointly owned vehicle for the bio-ethanol project.

Investment in the 2002 Company by Professor Hartley on behalf of his son

[73]In or just before May 2006 the 2002 Company received an investment of £20,000 from Professor Hartley via and on behalf of his son Christopher. The claimants contend that shows that Professor Hartley believed at that time that it was the 2002 Company that was to be the vehicle for the bio-ethanol project.[74]It is certainly consistent with such a belief, but in my view not proof of it. There was no evidence as to Professor Hartley’s motive in making this investment. All that is certain is that his original intention to invest £80,000 was not carried through. I think that at its highest, from the claimants’ point of view, this part of the evidence is consistent with the suggestion that around the end of April 2006 Professor Hartley may have expected the 2002 Company to become the corporate vehicle for a lucrative project, which could have been the bio-ethanol project which was to be protected by GB 890 or Professor Hartley’s own project, to be protected by the other patent application, or both. However that expectation changed after the end of April 2006.

Payment by the 2002 Company for the GB 890

[75]There is no dispute that the 2002 Company paid for the fees of Reddie & Grose for GB 890 and the other patent application to be filed. The claimants suggest that this evidences the individuals’ intention that the 2002 Company should own those patent applications.[76]But this is impossible to reconcile with the instruction to Dr Thornton of Reddie & Grose that BCTL should be the applicant. Somebody had to pay the fees. If, as seems likely, the 2002 Company was the only corporate entity with any money (unlike the 2005 Company and BCTL), then it was the only available candidate to pay. This is consistent with an expectation by the individuals that BCTL would be later under an obligation to repay the 2002 Company, nothing more than that.

Other matters

[77]For the reasons I have given I do not think that any of the evidence relied on by the claimants points to either Professor Hartley, Dr Yazdi or Dr Javed being de facto directors of the 2002 Company. Moreover there are factors which point the other way.[78]The logic of the claimants’ position is that there were during the period relied on (5 April 2005 to 31 May 2006) four directors of the 2002 Company of equal standing, of whom Mr Bookless was only one. This implies that Mr Bookless was content to, and did, in large part relinquish control of the 2002 Company at that time. This seems unlikely. It is clear that one of reasons that Professor Hartley and Drs Yazdi and Javed resisted passing the ownership of the patent applications to either the 2002 or the 2005 Company was that both were controlled by Mr Bookless alone. The minutes of the meetings suggest that Mr Bookless understood their view. He did not believe it made any sense – but not because he denied controlling those two companies.[79]The letters of 1 June 2006 from Mr Bookless reflect what was probably the true position. Mr Bookless felt he had the right to hire and fire in relation to 2002 Company and that he retained complete control of it. The response from the other three on 7 June 2006 states “We were not aware of being officially appointed as EECo Directors, and fully understand why you wish to sack us if that was the case.” I do not consider that this response indicates that they had any understanding of the concept of de facto directors or that the three had even heard of such a thing. However it does suggest that they, like Mr Bookless, believed that Mr Bookless controlled the 2002 Company and could hire and fire at will. (There is also a reference in the letter to treating expenses as director’s loans, but that is not the same as saying that Professor Hartley or Drs Yazdi or Javed were, in fact, directors).[80]Finally, even if the bio-ethanol project had at all times been unequivocally the business of the 2002 Company (which in my view it was not), it seems to me that the contributions of Professor Hartley and Drs Yazdi and Javed to the project would then have been more consistent with the acts of consultants, as opposed to acts which directed the activities of the company. The corporate governance of the 2002 Company would still always have remained with Mr Bookless.

Findings

[81]I therefore find that the meetings of the four individuals up to 31 May 2006 were meetings to discuss the bio-ethanol and other projects. They were not board meetings of officers of the 2002 Company or indeed any other company.[82]By the end of the period during which Professor Hartley and Drs Yazdi and Javed are said to have been de facto directors, 31 May 2006, no agreement had been reached as to which company or what ownership structure should be put in place to carry forward the bio-ethanol project, as protected by the GB 890 patent application. No agreement was ever reached.[83]Neither Professor Hartley nor Drs Yazdi or Javed represented themselves to be directors of the 2002 Company, nor were they so represented by others.[84]The corporate governance of the 2002 Company was at all times within the sole control of Mr Bookless.[85]Accordingly Professor Hartley and Drs Yazdi and Javed were never de facto directors of the 2002 Company.

Breach of fiduciary duty

[86]On the contrary assumption, i.e. that Professor Hartley and Drs Yazdi and Javed were de facto directors of the 2002 Company, was any of them in breach of his fiduciary duty because GB 890 was applied for in the name of BCTL and/or because they allowed it to remain in BCTL’s name up to 31 May 2006?[87]Mr Hicks did not dispute that if the three were de facto directors they could potentially be in breach of their fiduciary duty to the 2002 Company if they acted against that company’s interest.[88]Neither Dr Yazdi nor Dr Javed was at Reddie & Grose on 24 March 2006 although they learnt later that GB 890 (and the other application) had been filed in the name of their company, BCTL.[89]Professor Hartley was there with Mr Bookless. Mr Bookless’s evidence was that Professor Hartley instructed Dr Thornton of Reddie & Grose to file the applications naming BCTL as proprietor. Mr Bookless says that he was taken by surprise but acquiesced. Assuming that to be true, if Professor Hartley was in breach of his (assumed) fiduciary duty by instructing the applications to be filed in BCTL’s name, potentially so was Mr Bookless who, after all, was a de jure director of the 2002 Company and allowed this to happen.[90]Mr Dhillon’s way out of this difficulty was to say that whereas Professor Hartley knew enough about patent law to realise that his instruction was contrary to the interests of the 2002 Company, Mr Bookless was more naïve in such matters and did not. Mr Dhillon submitted that consequently, in law, Professor Hartley was in breach of his duty but Mr Bookless was not. Mr Dhillon did not point to any clear authority to support his contention of law in this regard, but for present purposes I will assume that he is right.[91]There was no suggestion that Drs Yazdi and Javed had any knowledge of patent law. Or at least, their naivety in that regard was no less than that of Mr Bookless. Therefore accepting Mr Dhillon’s proposition of law, once they knew that the patent applications were in the name of BCTL, it appears to me that they can no more have been in breach of their assumed fiduciary duty than Mr Bookless was in breach of his undoubted duty as a director.[92]Turning to Professor Hartley, I take the view that he was not in breach of the assumed duty either. First, it is not clear to me on the evidence that he was significantly wiser in the ways of patent law than Mr Bookless. Of course even a layman might think that filing in BCTL’s name would put the 2002 Company on the back foot if it wished to claim an interest in the patent applications, but as I have said, Mr Dhillon was forced to submit that this was not enough to lead to a breach of the fiduciary duty.[93]Secondly, the claimants put their case high against Professor Hartley. Mr Bookless made no bones in evidence about his allegation that Professor Hartley acted deliberately and dishonestly by, at the last minute, abandoning the agreed position that the applications should be in the name of the 2002 Company and instructing Dr Thornton to file instead in BCTL’s name. This is a serious allegation. Professor Hartley was not called to be cross-examined and so I had no means of assessing him as a witness. The surrounding evidence would need to be both cogent and consistent with the claimants’ case against Professor Hartley for me to accept what is said against him.

What happened on 24th March 2006?

[94]I must therefore consider with a little care the evidence of what happened at Reddie & Grose on 24th March 2006 and in the period immediately preceding that date.[95]The high point for Mr Bookless’s claim that Professor Hartley reneged on an agreement that the 2002 Company should be the applicant are the minutes of the early stages of the meeting of 5 March 2006 which record a consensus that in relation to the proposed patent applications for the (then three) projects “EECO should be the assignee”. I have already mentioned that a persistent problem with the documents in this case is having to resolve what is meant by ‘EECO’ (and other names) in any given context. In the context of these minutes, I would say that EECO probably meant the 2002 Company. But the agreement, such as it was, that the 2002 Company should be ‘assignee’ of any patent applications was at the start of the meeting and the discussion moved on. Even in those minutes it is clear that the four individuals subsequently could not agree about which company should control the projects, which company should own what and how shares in the various companies should be divided. I think that whatever may have been provisionally agreed at the start of that meeting, nothing was agreed by the end.[96]The successive drafts of patent applications, including that which became GB 890, which were circulated on 11 and 21 March 2006 identified ‘Elsworth Ethanol Company Limited’ as the applicant. As I have said, the only company at that time to which the name ‘Elsworth Ethanol’ was attached (albeit prospectively) was the 2005 Company. So it seems that even if there was ever a consensus as to who should apply for the patents, after 5 March it was the 2005 Company which the individuals had in mind.[97]By the time Professor Hartley and Mr Bookless met at Reddie & Grose on 24 March 2006 it is possible that there still existed a consensus among the four individuals that the 2005 Company was to be the applicant for the patents. More likely, there was still no final joint view.[98]Mr Bookless’s evidence was that when Professor Hartley instructed Dr Thornton to file in BCTL’s name Mr Bookless was taken by surprise but went along with it. He says that he did not realise the significance of what had happened for many months. There is no evidence that he raised any objection until his letter of 22 May 2007.[99]I should mention Dr Thornton’s account of what happened. Dr Thornton was not called as a witness. However he sent an email dated 26 January 2007, in reply to Mr Bookless, in which he gave a different version of events:
“…I note that the 3rd point in your email states that: “Elsworth paid for the filing, Brian Hartley only making the suggestion of BCTL as you walked out the room to file”
. Simply by way of clarification, I point out that this does not fit with my record of our meeting of 24th March 2006. At the meeting I raised the question of the name in which the applications should be filed. This arose because the original draft specifications I had been given specified that the Applicant was to be EECO, but subsequent revised drafts specified BCTL. This was discussed in the meeting, and I was then instructed by you to file the applications in BCTL’s name.”[100]Mr Bookless’s position was that Dr Thornton was not telling the truth in this email, with an eye to protecting himself from what he perceived to have been a professional mistake.[101]I think it is unlikely that Dr Thornton would feel that he was under any pressure to justify himself. On Mr Bookless’s account of what happened Dr Thornton was still given clear instructions to file in BCTL’s name by Professor Hartley and he did so. He could not be criticised for that. On the other hand, it is hard to see why, as Dr Thornton alleges, Mr Bookless should have suggested that the applicant was BCTL.[102]Although Professor Hartley did not give evidence his Defence gives a condensed indication of his recollection of the meeting. Paragraph 13 states:
“13. The two patents were assigned to BCTL and filed with Reddie and Grose by myself and Neil Bookless on 24th March 2006. … [Mr Bookless] was present and did not object to this assignation” … [Mr Bookless] was present and did not object to this assignation”
[103]I think on balance, and I find, that the instruction to file in BCTL’s name came from Professor Hartley and Mr Bookless raised no objection.[104]Subject to the agreement of Drs Javed and Yazdi, the inventors for GB 890, it was open to Professor Hartley and Mr Bookless to suggest any party they thought appropriate to be applicant. Professor Hartley chose BCTL and there was nothing improper in that choice. Mr Bookless did not object and unsurprisingly nor did Dr Javed or Dr Yazdi later. BCTL was their company.[105]I therefore do not accept Mr Bookless’s allegations against Professor Hartley.[106]It also follows that even if Professor Hartley had been a de facto director of the 2002 Company, he was not in breach of his fiduciary duty to that company by nominating BCTL as the applicant for GB 890 on 24th March 2006.

The period from 24th March to 31st May 2006

[107]There was no relevant change in circumstance between 24th March and 31st May 2006. Professor Hartley and Drs Yazdi and Javed had no reason to think that Mr Bookless objected to BCTL as applicant. Nor did anything else happen to create a breach of fiduciary duty to the 2002 Company by maintaining BCTL as the applicant (here still assuming that there was such a duty in the first place).

Breach of contract

[108]At the trial Mr Dhillon only faintly pressed the argument that filing GB 890 in BCTL’s name constituted a breach of contract.[109]The re-amended Particulars of Claim identify two alleged contracts. The first (“the Elsworth Agreement”) is said to have been between the 2002 Company and all the defendants. The agreement was that the 2002 Company would provide the funding for the research that led to the inventions, including that claimed in GB 890, and in return the 2002 Company would be named as applicant. This agreement is said to have been ‘evidenced’ partly by conduct and partly in writing on 5th March 2006.[110]There are problems with this. To begin with a minor one, Ensus cannot have been a party to this agreement, but I assume that this is just a drafting error. More seriously, the pleading does not identify when or how the agreement took place. It is said to be evidenced by something in writing on 5th March 2006 and by conduct, but if so, that evidence must support a concluded agreement that happened on or before 5th March 2006. It is not clear what this was. None of this was clarified at trial.[111]The short point, though, is that Mr Bookless, Professor Hartley and Drs Yazdi and Javed never even reached an informal consensus, far less a binding agreement, as to who should be named on any patent applications. There was no contract.[112]The alternative agreement on which the claimants rely, “the Bookless Agreement”, takes the same form as the Elsworth Agreement, based on the same grounds, save that it is said to have been concluded between Mr Bookless and the defendants. The case in relation to this alleged agreement fails for the same reasons.

Conclusion

[113]The claimants’ claim fails, both in relation to breach of fiduciary duty by de facto directors of the 2002 Company and in relation to breach of contract.

Cited in 1 later judgment